Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Aguilar wrote: Sun Aug 14, 2022 9:55 pm
SnowBog wrote: Wed Aug 10, 2022 3:05 pm
Ideally, your tax-advantaged accounts have "enough" of all your major asset classes so you can do 100% of any required rebalancing the - avoiding any tax impact as well. But if you are forced to rebalance in taxable, it makes it harder to rebalance. For example, say you needed to sell $20k of your muni funds to invest in your total stock market funds to maintain your AA. You'd to execute that in one brokerage (Vanguard), wait probably 2 days for the funds to settle, transfer to your other brokerage (eTrade) which likely takes 1-2+ days, and finally when the funds are available in your end brokerage (eTrade) you can finish the rebalance.

Candidly, it's for the reason above that I keep a healthy portion of stocks and international in my 401k. I want to ensure I can rebalance exclusively there. That drove me to add muni bonds and savings bonds "before" my 401k was full with bonds.
This is what I'm trying to address in my plan now before I start implementing it. I want to avoid having tax consequences in my brokerage if I have to sell shares of a fund to rebalance my portfolio. Currently thinking through what I could do with my 401k so I can rebalance there. If, after moving my old 401k and TIRA into my new 401k, I exchange a sizeable portion of my bonds to equities, I'd need to buy A LOT of bonds in my brokerage to maintain my AA, and I don't plan on investing my cash all at once (prefer to DCA). Another option is to exchange stocks for bonds in my Roth but I don't want to do that because my goal with my Roth is to get to 100% equities.

How would you recommend I approach this?
Personally, I moved some International into my Roth to "free up" space in my 401k. So my Roth now holds Total Stock and Total International (no bonds). I'm lucky to have a "Mega Backdoor Roth" so I can hold a good chunk of my international here, and mostly rebalance international there...

I kept a small amount of international in my 401k, but the bulk of it is bonds with "enough" stocks to let me rebalance in my 401k.

If I recall, it took me awhile to get to my target AA and placement. I use 5%/25% rebalancing bands (only rebalance if something is off by > 5% of AA or 25% of its individual value), if less than that I just rebalance via "new money". I generally max out tax-advantaged accounts first, so my taxable account doesn't get much growth until later in the year. Which meant for the first part of the year I directed all new 401k investments to whatever I wanted more of (for example, stocks), which on its own didn't put me out of my rebalancing bands. Then as my money started to flow into taxable, I did the same (except for now it was going into muni bonds).

While doing the above, I did have a few large taxable changes. Part of my comp includes stock grants, and I participate in an employee stock purchase plan. These are sold ASAP, and moved to where needed (currently bonds). I've also decided that I'm too concentrated in an employer stock (that I didn't used to sell), which I periodically sell off in large chucks, and again reinvest where needed.

So it might have taken me many months to complete... But it worked out.
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Aguilar wrote: Sun Aug 14, 2022 9:55 pm and I don't plan on investing my cash all at once (prefer to DCA)
Food for thought on DCA vs. lump sum.

Historically, lump sums "wins" far more often. (The exceptions are the past year where markets often had monthly losses.)

Bonds, especially muni bonds, don't change a lot. (Although I was surprised in March 2020 and much of this year how much they change... Relative to stocks, not so much...).

If the money is sitting in cash currently, you are likely losing more to inflation than you'd lose even if you lump sum and we had a loss (you presumably aren't investing for tomorrow, your are investing for years and years from now, when all expectations are the investment will have grown by then)...

For taxable, even if you have a loss, you can "Tax Loss Harvest", which can be especially beneficial if you are currently in high tax years, and are likely to be in lower tax years later.

Ultimately, as they say, "time in the market beats timing the market."
User avatar
retiredjg
Posts: 49201
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by retiredjg »

Aguilar wrote: Sun Aug 14, 2022 9:55 pm This is what I'm trying to address in my plan now before I start implementing it. I want to avoid having tax consequences in my brokerage if I have to sell shares of a fund to rebalance my portfolio. Currently thinking through what I could do with my 401k so I can rebalance there. If, after moving my old 401k and TIRA into my new 401k, I exchange a sizeable portion of my bonds to equities, I'd need to buy A LOT of bonds in my brokerage to maintain my AA, and I don't plan on investing my cash all at once (prefer to DCA). Another option is to exchange stocks for bonds in my Roth but I don't want to do that because my goal with my Roth is to get to 100% equities.

How would you recommend I approach this?
Do not exchange a sizable portion of your bonds in 401k to equities. If you simply must have some equites there, use a small slice - 5% of the portfolio or less.

Do your rebalancing with new money going into the portfolio. Always add money to the asset class you have too little of.

During times of big market downturns, sell stocks in taxable and buy bonds to maintain your AA. Take the losses off your taxable. When the market turns around sell bonds and buy stocks to maintain your AA. The bonds will not have large capital gains and you will have losses to offset them anyway.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

retiredjg wrote: Mon Aug 15, 2022 6:56 am
Aguilar wrote: Sun Aug 14, 2022 9:55 pm This is what I'm trying to address in my plan now before I start implementing it. I want to avoid having tax consequences in my brokerage if I have to sell shares of a fund to rebalance my portfolio. Currently thinking through what I could do with my 401k so I can rebalance there. If, after moving my old 401k and TIRA into my new 401k, I exchange a sizeable portion of my bonds to equities, I'd need to buy A LOT of bonds in my brokerage to maintain my AA, and I don't plan on investing my cash all at once (prefer to DCA). Another option is to exchange stocks for bonds in my Roth but I don't want to do that because my goal with my Roth is to get to 100% equities.

How would you recommend I approach this?
Do not exchange a sizable portion of your bonds in 401k to equities. If you simply must have some equites there, use a small slice - 5% of the portfolio or less.

Do your rebalancing with new money going into the portfolio. Always add money to the asset class you have too little of.

During times of big market downturns, sell stocks in taxable and buy bonds to maintain your AA. Take the losses off your taxable. When the market turns around sell bonds and buy stocks to maintain your AA. The bonds will not have large capital gains and you will have losses to offset them anyway.
I was always told to avoid incurring capital gains in my brokerage. So you're saying I should just be prepared for it during big market downturns? I've never sold anything in my taxable account. Is there a Wiki article about selling in one's brokerage and planning ahead to deal with estimated tax payments, etc? That's what concerns me, having to sell in my brokerage and then having a hefty tax bill and underpayment penalties.
Last edited by Aguilar on Mon Aug 15, 2022 9:57 pm, edited 1 time in total.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

SnowBog wrote: Sun Aug 14, 2022 11:31 pm
Aguilar wrote: Sun Aug 14, 2022 9:55 pm and I don't plan on investing my cash all at once (prefer to DCA)
Food for thought on DCA vs. lump sum.

Historically, lump sums "wins" far more often. (The exceptions are the past year where markets often had monthly losses.)

Bonds, especially muni bonds, don't change a lot. (Although I was surprised in March 2020 and much of this year how much they change... Relative to stocks, not so much...).

If the money is sitting in cash currently, you are likely losing more to inflation than you'd lose even if you lump sum and we had a loss (you presumably aren't investing for tomorrow, your are investing for years and years from now, when all expectations are the investment will have grown by then)...

For taxable, even if you have a loss, you can "Tax Loss Harvest", which can be especially beneficial if you are currently in high tax years, and are likely to be in lower tax years later.

Ultimately, as they say, "time in the market beats timing the market."
That's a good point. Inflation is putting a hurt on my cash. As for the NY munis fund, it's down over 8% this year.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

retiredjg wrote: Fri Aug 12, 2022 1:48 pm There is one other possibility - find ETFs from some fund family other than Vanguard to use for those two funds. There are a number of other really good fund families - iShares and Blackrock come to mind, but I am sure there are others worth using.

ETrade apparently has two separate screeners - one for mutual funds and one for ETFs. I feel sure eTrade offers some other national short term muni fund/ETF and they may also have something for a NY muni fund.

If you don't know how to use a fund screener, you'll just have to figure it out by fiddling wih it. Pick the asset class you want (in this case muni bond fund or state muni bond fund). You can tell it you want funds from only certain fund families, or ERs less than ___, and things like only no transaction fee funds (NTF).
I checked the eTrade screeners.

As far as NY long term munis ETFs, they only offer one: INVESCO NEW YORK AMT-FREE MUNICIPAL BOND ETF (PZT) with a 0.28% ER and 0.30% premium discount (not sure what that means).

The selection of natl short term munis ETFs is wider. Some options:

ISHARES SHORT-TERM NATIONAL MUNI BOND ETF (SUB) 0.07% ER
JPMORGAN ULTRA-SHORT MUNICIPAL INCOME ETF (JMST) 0.18% ER
VANECK SHORT MUNI ETF (SMB) 0.20% ER
SPDR NUVEEN BLOOMBERG SHORT TERM MUNICIPAL BOND ETF (SHM) 0.20% ER
BLACKROCK SHORT MATURITY MUNICIPAL BOND ETF (MEAR) 0.25%

I don't have much knowledge around how to compare these with each other or with Vanguard Limited-Term Tax-Exempt. Do you have any suggestions?

Like you said, eTrade offers the Vanguard funds in Investor Shares, as an option B.

VANGUARD NY LONG-TERM TAX-EXEMPT INV (VNYTX) 0.17% ER
VANGUARD LTD-TERM TX-EX (VMLTX)NTF 0.17% ER
User avatar
grabiner
Advisory Board
Posts: 32513
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by grabiner »

Aguilar wrote: Mon Aug 15, 2022 9:49 pm I checked the eTrade screeners.

As far as NY long term munis ETFs, they only offer one: INVESCO NEW YORK AMT-FREE MUNICIPAL BOND ETF (PZT) with a 0.28% ER and 0.30% premium discount (not sure what that means).
The premium/discount means that this ETF last traded at a 0.30% premium to the fund's estimate of the values of the bonds. Since munis aren't very liquid, this doesn't mean that you would be overpaying by 0.30%; the ETF may have a better estimate of the price.

The 0.28% expense ratio means that you do get a small benefit compared to a national muni fund. This fund has a 3.20% yield, so a national fund with the 0.07% expense ratio of VTEB would have a 3.41% yield, but that would be 3.07% after 10% NY state and city tax.
The selection of natl short term munis ETFs is wider. Some options:

ISHARES SHORT-TERM NATIONAL MUNI BOND ETF (SUB) 0.07% ER
JPMORGAN ULTRA-SHORT MUNICIPAL INCOME ETF (JMST) 0.18% ER
VANECK SHORT MUNI ETF (SMB) 0.20% ER
SPDR NUVEEN BLOOMBERG SHORT TERM MUNICIPAL BOND ETF (SHM) 0.20% ER
BLACKROCK SHORT MATURITY MUNICIPAL BOND ETF (MEAR) 0.25%

I don't have much knowledge around how to compare these with each other or with Vanguard Limited-Term Tax-Exempt. Do you have any suggestions?
The key factors for comparison are expenses, duration, and credit quality. I believe all of these have similar credit quality, and all but the ultra-short JMST have similar durations, so SUB is the fund you want if you hold a short-term muni fund at E-Trade; it has a 2-year duration. It would be similar to the Vanguard recommendation of LImited-Term Tax-Exempt, which has 0.09% expenses and a duration of 2.4 years.
Wiki David Grabiner
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Aguilar wrote: Mon Aug 15, 2022 8:43 pm I was always told to avoid incurring capital gains in my brokerage. So you're saying I should just be prepared for it during big market downturns? I've never sold anything in my taxable account. Is there a Wiki article about selling in one's brokerage and planning ahead to deal with estimated tax payments, etc? That's what concerns me, having to sell in my brokerage and then having a hefty tax bill and underpayment penalties.
As a general rule, that's correct - you don't want to sell and incur gains in your taxable account when you don't need to - as that's basically just choosing to pay potentially unnecessary taxes. There are some exceptions, such as if it's a fund you don't want to hold and/or don't believe in anymore, things like having a "concentrated position" (aka too many eggs in a single basket - such as in particular an individual stock).

But I think the advice retiredjg gave was more aligned with Tax Loss Harvesting. https://www.bogleheads.org/wiki/Tax_loss_harvesting

For example, let's say you buy $100k of VTSAX today - and tomorrow it drops 10% ($10k). You can sell at a loss and thus "harvest" that 10% loss ($10k) to offset future gains. Any loses offset dollar for dollar any gains - so the next $10k of gains you'd have would be tax-free. If you don't "use up" the $10k loss with gains, it can offset up to $3k of "ordinary" (think paycheck, interest, non-qualified dividends) income per tax year. Losses carry forward until completely used up.

So again, in a hypothetical that markets take a big drop - and you end up "outside" of your rebalancing bands - you could sell equities in taxable - potentially "harvesting a loss" in the process. You'd use the funds to buy as many bonds as you need to be back within your rebalance bands. When stocks recover to the point of being outside your rebalancing bands, you could sell enough taxable bonds (potentially with some gains - but potentially less than the "losses" that you previously harvest - in other words with potentially $0 due in taxes) and rebuy stocks.

In theory - great plan! In reality - really depends on the timing and amount of your taxable purchases. I don't mean "timing" as in trying to "time the market" - that's a fool's errand... But I'll use myself to explain... As (I think) previously noted, I spend the first part of the year maxing out my tax-advantaged accounts with very little going into taxable, only once my tax-advantaged accounts are filled do I start buying in taxable again. I'm not yet to that point, meaning I haven't really made a sizable taxable purchase since late 2021. So, for me to harvest losses, I need a market loss big enough to wipe out the gains since December (or whenever my last taxable investment was). That has happened this year, and in times like March 2020, but it's not a "regular" occurrence - I think I went > 2 years without harvesting a loss from when I first learned about the concept. Let's say instead of my approach, I buy $1000 a month in taxable, every month. I'm more likely to have a loss to "harvest" as I'm buying more frequently, but even if the markets are down say 20% - that's only a $200 loss (and maybe some from the month prior, etc.). Personally, my threshold is a fund needs to have at least a $1000 loss to make it worth the effort (there's some complexity in finding and managing "TLH pairs", etc.). So I find I have few TLH opportunities in taxable - but YMMV...

However, think through the same scenario in your 401k. In a market crash, you'd need to sell bonds to buy stocks to maintain your AA. If your 401k is already bond heavy - you could sell them and buy stocks as needed in your 401k without tax impact. When markets recover, you can likely just reverse the trade (stocks for bonds) again without tax impact. Where you might struggle with a bond heavy 401k is when stocks are booming - and you need to sell stocks to buy bonds. If you don't have enough stocks in your 401k, you might be forced to sell in your taxable account - and thus incur the taxes as a result.

But I think that circles back to another point retiredjg gave:
retiredjg wrote: Mon Aug 15, 2022 6:56 am Do your rebalancing with new money going into the portfolio. Always add money to the asset class you have too little of.
With rare exceptions - namely large corrections like we've seen this year and in 2020 - this is exactly what I do as well. Whenever possible, I use new money to get things where I want, both at a macro level and within the accounts.

I have a spreadsheet that I use to track my portfolio (I use Excel - the Microsoft 365 version of which included financial data types - which automatically can pull in prices - so I just enter 100 shares of VTI and it stay's up-to-date with what that's worth). I use that to track my "current" AA, as well as my "target" AA, and to alert me if I'm outside of my rebalance bands (and if so, how much I need to rebalance). I also use it to track projected investments for the year, so I can "see" where my projected year-end AA will be, and I adjust accordingly

For example, my target AA is 60/40 and my current AA is 63/37 - meaning "new" investments need to go to bonds. I have roughly $15k planned contributions to a Mega Backdoor Roth yet this year - which will stay in stocks (as I don't hold bonds in Roth). But the rest of my contributions will go to bonds/fixed income. My year end projection (obviously affected by what the markets due between now and then) is I'll end up at 62/38. Next year I'll continue to do the same, use "new" money to nudge the AA where I want it.

So, to my example above (401k without enough stocks to rebalance during a market boom), if my "current" AA gets to 65% equities it would trigger a "rebalance" (against my target of 60%). Before doing so, I'll first look to see what my projected year-end AA would be if I put all "new" money into bonds, again with the exception of keeping Roth 100% stocks. If that's enough to return my AA to within my "range", then I don't do anything else (just keep nudging it back where I want). Only when it's clear that I don't have enough new money to get back to my target AA range will I actively rebalance.

Likewise, if you want to grow your equity position in your 401k, and you don't want to do an "exchange" to do so, just start directing "new" money in your 401k into equities until you get to the amount ($ or %) you want to hold there. That might mean putting an equal (or larger) amount of taxable investments into bonds to maintain your overall AA, but hopefully you get the idea...
User avatar
retiredjg
Posts: 49201
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by retiredjg »

Aguilar wrote: Mon Aug 15, 2022 8:43 pm
retiredjg wrote: Mon Aug 15, 2022 6:56 am
Aguilar wrote: Sun Aug 14, 2022 9:55 pm This is what I'm trying to address in my plan now before I start implementing it. I want to avoid having tax consequences in my brokerage if I have to sell shares of a fund to rebalance my portfolio. Currently thinking through what I could do with my 401k so I can rebalance there. If, after moving my old 401k and TIRA into my new 401k, I exchange a sizeable portion of my bonds to equities, I'd need to buy A LOT of bonds in my brokerage to maintain my AA, and I don't plan on investing my cash all at once (prefer to DCA). Another option is to exchange stocks for bonds in my Roth but I don't want to do that because my goal with my Roth is to get to 100% equities.

How would you recommend I approach this?
Do not exchange a sizable portion of your bonds in 401k to equities. If you simply must have some equites there, use a small slice - 5% of the portfolio or less.

Do your rebalancing with new money going into the portfolio. Always add money to the asset class you have too little of.

During times of big market downturns, sell stocks in taxable and buy bonds to maintain your AA. Take the losses off your taxable. When the market turns around sell bonds and buy stocks to maintain your AA. The bonds will not have large capital gains and you will have losses to offset them anyway.
I was always told to avoid incurring capital gains in my brokerage. So you're saying I should just be prepared for it during big market downturns? I've never sold anything in my taxable account. Is there a Wiki article about selling in one's brokerage and planning ahead to deal with estimated tax payments, etc? That's what concerns me, having to sell in my brokerage and then having a hefty tax bill and underpayment penalties.
There should not be any large cap gains or hefty tax bill because you tax loss harvest as the market goes down.

There is information in the Wiki about tax loss harvesting.

Also, as mentioned by snowbog, you would be selling bonds in your 401k and buying stocks in order to maintain your stock to bond ratio as the stock market goes down. The reverse on the way up.

You can also sell bonds and buy stocks in taxable on the way down. On the way up, you sell stocks to buy bonds to maintain the stock to bond ratio. When selling these stocks, you try to sell the ones with the least gains (the last you bought) each time.
User avatar
retiredjg
Posts: 49201
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by retiredjg »

Aguilar wrote: Mon Aug 15, 2022 9:49 pm I checked the eTrade screeners.

As far as NY long term munis ETFs, they only offer one: INVESCO NEW YORK AMT-FREE MUNICIPAL BOND ETF (PZT) with a 0.28% ER and 0.30% premium discount (not sure what that means).
Since it is cheaper, I would probably just use the VANGUARD NY LONG-TERM TAX-EXEMPT INV (VNYTX) 0.17% ER instead of the one above.


If you don't mind using ETFs, ISHARES SHORT-TERM NATIONAL MUNI BOND ETF (SUB) 0.07% ER seems a good choice over VANGUARD LTD-TERM TX-EX (VMLTX)NTF 0.17% ER.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

grabiner wrote: Mon Aug 15, 2022 10:26 pm
Aguilar wrote: Mon Aug 15, 2022 9:49 pm I checked the eTrade screeners.

As far as NY long term munis ETFs, they only offer one: INVESCO NEW YORK AMT-FREE MUNICIPAL BOND ETF (PZT) with a 0.28% ER and 0.30% premium discount (not sure what that means).
The premium/discount means that this ETF last traded at a 0.30% premium to the fund's estimate of the values of the bonds. Since munis aren't very liquid, this doesn't mean that you would be overpaying by 0.30%; the ETF may have a better estimate of the price.

The 0.28% expense ratio means that you do get a small benefit compared to a national muni fund. This fund has a 3.20% yield, so a national fund with the 0.07% expense ratio of VTEB would have a 3.41% yield, but that would be 3.07% after 10% NY state and city tax.
The selection of natl short term munis ETFs is wider. Some options:

ISHARES SHORT-TERM NATIONAL MUNI BOND ETF (SUB) 0.07% ER
JPMORGAN ULTRA-SHORT MUNICIPAL INCOME ETF (JMST) 0.18% ER
VANECK SHORT MUNI ETF (SMB) 0.20% ER
SPDR NUVEEN BLOOMBERG SHORT TERM MUNICIPAL BOND ETF (SHM) 0.20% ER
BLACKROCK SHORT MATURITY MUNICIPAL BOND ETF (MEAR) 0.25%

I don't have much knowledge around how to compare these with each other or with Vanguard Limited-Term Tax-Exempt. Do you have any suggestions?
The key factors for comparison are expenses, duration, and credit quality. I believe all of these have similar credit quality, and all but the ultra-short JMST have similar durations, so SUB is the fund you want if you hold a short-term muni fund at E-Trade; it has a 2-year duration. It would be similar to the Vanguard recommendation of LImited-Term Tax-Exempt, which has 0.09% expenses and a duration of 2.4 years.
Thanks for the guidance. I've never invested in ETFs before but after getting all the input on this thread, it sounds like it would be a net benefit to invest in SUB rather than the Vanguard investor's fund, for portability. The Vanguard admiral shares aren't available with eTrade, and having everything in one brokerage seems like an advantage, for tracking my portfolio and handling any rebalancing.

How does INVESCO NEW YORK AMT-FREE MUNICIPAL BOND ETF (PZT) compare with VNYTX? How do you compare ETFs with mutual funds?
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

As one of those nudging you towards ETFs, I should clarify.

I'm no longer a fan of ETFs for muni bonds. At the state level, there are few (if any) low cost options. There are some great options (VTEB and Sub) at the national level. But if you plan to tax loss harvest if the opportunity arises, you need to be mindful of the "finer points" of muni bonds, specifically ETFs as noted/linked above. To avoid that extra complexity, I keep my muni bonds in mutual funds.

But given a choice for equity funds, such as total stock or international, I'd choose to hold them as ETFs.

However, it sounds like you already own VTSAX (vs. VTI). In that case, I wouldn't "add" an ETF just to have one... Likewise, I wouldn't attempt to convert from VTSAX to VTI just to do so. I'd just keep buying VTSAX as needed.

I might think the same for other mutual funds as well, but Vanguard has some unique advantages. Not the least of which is that if your funds were held at Vanguard, they can convert you from the mutual fund to the ETF without any tax consequences. So portability is less of an issue... If you wanted to move your funds somewhere that didn't accept VTSAX, or would charge you transaction fees, you could temporarily move them to Vanguard, convert to ETF, then move them pretty much anywhere.

In the end, "don't let perfection be the enemy of the good".
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

retiredjg wrote: Tue Aug 16, 2022 7:24 am
There should not be any large cap gains or hefty tax bill because you tax loss harvest as the market goes down.

There is information in the Wiki about tax loss harvesting.

Also, as mentioned by snowbog, you would be selling bonds in your 401k and buying stocks in order to maintain your stock to bond ratio as the stock market goes down. The reverse on the way up.

You can also sell bonds and buy stocks in taxable on the way down. On the way up, you sell stocks to buy bonds to maintain the stock to bond ratio. When selling these stocks, you try to sell the ones with the least gains (the last you bought) each time.
I've TLH'd before in my brokerage a few times so I understand it. So when you say I'd TLH as the market goes down, are you referring to TLH'ing my equity funds in my brokerage? And so to rebalance I'd either sell bonds in my 401k and buy stocks OR sell bonds in my taxable and buy stocks, but if I did the latter and sold bonds with cap gains, the TLH would offset the cap gains?

If market goes up and I don't have stocks in my 401k to sell, then like you said I sell the stocks with the smallest cap gains in my brokerage and buy bonds, and if I have any past TLH 'credit' to apply, I apply it to reduce my cap gains. That makes sense.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

SnowBog wrote: Mon Aug 15, 2022 11:01 pm
So, to my example above (401k without enough stocks to rebalance during a market boom), if my "current" AA gets to 65% equities it would trigger a "rebalance" (against my target of 60%). Before doing so, I'll first look to see what my projected year-end AA would be if I put all "new" money into bonds, again with the exception of keeping Roth 100% stocks. If that's enough to return my AA to within my "range", then I don't do anything else (just keep nudging it back where I want). Only when it's clear that I don't have enough new money to get back to my target AA range will I actively rebalance.

Likewise, if you want to grow your equity position in your 401k, and you don't want to do an "exchange" to do so, just start directing "new" money in your 401k into equities until you get to the amount ($ or %) you want to hold there. That might mean putting an equal (or larger) amount of taxable investments into bonds to maintain your overall AA, but hopefully you get the idea...
That first part is interesting. And I'm guessing during a market bust, you'd project your year end AA if you put all new money into stocks? I guess I just need to get comfortable with the notion of gradually moving towards my AA range (I use 5% bands) rather than how I've done it in the past, in which I rebalanced at once when I departed from my bands, and got back to my AA range on a day's notice.

As for your second point here, that makes sense. If I were to convert bonds to stocks in my 401k, I'd have to sell stocks for large cap gains in my brokerage to buy bonds there, to keep my AA in check. I don't want to do that. So I'll plan to invest new 401k contributions in stocks and offset that by putting new money into bonds in my brokerage.

Fidelity contacted me and offered me $1k to move my brokerage there. I'm already moving my TIRA there to do the backdoor Roth later, and my old 401k is getting moved to my new 401k, and both are with Fidelity. Having everything in one place is appealing and I know Fidelity has a wide selection of funds. The thing is, the Vanguard NY muni long term Investors and Vanguard Limited Term Exempt Investors have $75 transaction fees at Fidelity.

I've been put in touch with a Fidelity fixed income specialist and we spoke earlier today. He suggested talking further about putting together a bond ladder for me and mentioned there are also many municipal bond funds to consider. I told him how I wanted to diversify my munis between NY and natl and he implied NY might be enough on its own, which threw me for a loop. We have a follow-up call Monday morning. He said Fidelity would provide guidance on the bond ladder and any reinvesting down the road when bonds reach maturity for free.

What are your thoughts on a bond ladder vs muni funds? Are there any specific questions you recommend I ask Fidelity? Some of his comments went over my head because I don't know bonds that well. The way he described the Vanguard NY muni fund was that Vanguard will sell bonds when they reduce in shelf-life (ie. go from a long term horizon to mid term) and so more cap gains would be triggered than with a bond ladder.
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Aguilar wrote: Fri Aug 19, 2022 4:59 pm
SnowBog wrote: Mon Aug 15, 2022 11:01 pm
So, to my example above (401k without enough stocks to rebalance during a market boom), if my "current" AA gets to 65% equities it would trigger a "rebalance" (against my target of 60%). Before doing so, I'll first look to see what my projected year-end AA would be if I put all "new" money into bonds, again with the exception of keeping Roth 100% stocks. If that's enough to return my AA to within my "range", then I don't do anything else (just keep nudging it back where I want). Only when it's clear that I don't have enough new money to get back to my target AA range will I actively rebalance.
...
That first part is interesting. And I'm guessing during a market bust, you'd project your year end AA if you put all new money into stocks? I guess I just need to get comfortable with the notion of gradually moving towards my AA range (I use 5% bands) rather than how I've done it in the past, in which I rebalanced at once when I departed from my bands, and got back to my AA range on a day's notice.
For clarity, I use 5% bands as well, and when I break the bands, I will rebalance "all at once" when it's clear I can't get there with "new" money (or maybe more accurately, can't get there in a reasonable amount of time).

But let's put this into context, using your 70/30 AA, with IIRC your $2M portfolio. A 20% drop in the markets would still be "within" the 5% bands. A drop of 30% would put you out of band (62/38), and you'd need at least $47k to get back within 5%; which if you save that much per year, you'd reach just using new money. (You may want to just rebalance ASAP anyway... I wouldn't, but nothing against it...) A 50% drop brings you closer to 54/46, it would take at least $145k to get back within +/- 5% of 60/40, which would probably mean you need to rebalance...

In reality though, your portfolio will change over time more often. I don't wait until I "run into the rocks" (aka get outside the 5% band) before I turn the steering wheel. For example, I'll likely have excess cash to invest in taxable in the next several weeks. My default is to invest taxable as 100% stocks. But my AA is currently 63/37 (target 60/40) - so I'm "low" on bonds. My pre-tax is maxed for the year, and I'm starting to fill up my Mega Backdoor Roth (which is always 100% stocks). So, I'll invest excess taxable into bonds unless/until my AA is 60/40 again (for 30 seconds). So, my "rebalancing" is really more small adjustments throughout the year vs. waiting until I hit some threshold.

Aguilar wrote: Fri Aug 19, 2022 4:59 pm I've been put in touch with a Fidelity fixed income specialist and we spoke earlier today. He suggested talking further about putting together a bond ladder for me and mentioned there are also many municipal bond funds to consider. I told him how I wanted to diversify my munis between NY and natl and he implied NY might be enough on its own, which threw me for a loop. We have a follow-up call Monday morning. He said Fidelity would provide guidance on the bond ladder and any reinvesting down the road when bonds reach maturity for free.

What are your thoughts on a bond ladder vs muni funds? Are there any specific questions you recommend I ask Fidelity? Some of his comments went over my head because I don't know bonds that well. The way he described the Vanguard NY muni fund was that Vanguard will sell bonds when they reduce in shelf-life (ie. go from a long term horizon to mid term) and so more cap gains would be triggered than with a bond ladder.
Regarding ladders vs. funds - if you haven't yet, read: https://www.bogleheads.org/wiki/Rolling ... bond_funds

My concern with anyone (Fidelity, Vanguard, etc.) is always "what's in it for them". Bonds are usually sold/auctioned at published rates, and then resold on the secondary market. I'm not a fan of buying them on the secondary market, as you are likely paying a higher cost (maybe fees) to do so... But a bond ladder with newly issued bonds (no fees) may not be bad... But it likely adds unnecessary complexity (who's going to manage the ladder, figure out what to replace expiring rungs with, etc.).

Personally, I like the simplicity and broader diversification of bond funds, so that's what I use - with the exception of I Bonds (and EE Bonds - which I do use to build my own ladder).
User avatar
retiredjg
Posts: 49201
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by retiredjg »

Aguilar wrote: Fri Aug 19, 2022 4:43 pm
retiredjg wrote: Tue Aug 16, 2022 7:24 am
There should not be any large cap gains or hefty tax bill because you tax loss harvest as the market goes down.

There is information in the Wiki about tax loss harvesting.

Also, as mentioned by snowbog, you would be selling bonds in your 401k and buying stocks in order to maintain your stock to bond ratio as the stock market goes down. The reverse on the way up.

You can also sell bonds and buy stocks in taxable on the way down. On the way up, you sell stocks to buy bonds to maintain the stock to bond ratio. When selling these stocks, you try to sell the ones with the least gains (the last you bought) each time.
I've TLH'd before in my brokerage a few times so I understand it. So when you say I'd TLH as the market goes down, are you referring to TLH'ing my equity funds in my brokerage? And so to rebalance I'd either sell bonds in my 401k and buy stocks OR sell bonds in my taxable and buy stocks, but if I did the latter and sold bonds with cap gains, the TLH would offset the cap gains?
Yes. And bonds typically don't have large capital gains anyway.

If market goes up and I don't have stocks in my 401k to sell, then like you said I sell the stocks with the smallest cap gains in my brokerage and buy bonds, and if I have any past TLH 'credit' to apply, I apply it to reduce my cap gains. That makes sense.
Yes, but at that point, your 401k should have stocks in it. I should have been more clear - The first place to rebalance on the way down would be the 401k which will push it toward stocks. Then, as you run out of bonds to sell in the 401k, switch to selling bonds in the taxable to buy stocks.

After the market has turned around and you have a need to rebalance the other way, sell the last stocks you bought in taxable first as they will have the least gains (or maybe not gains at all yet). And so on doing it all in reverse order. You must be using specific identification of shares to do it this way. FIFO will not work right.

This is the plan that makes sense to me. I have not done this myself because I've never had a taxable account during a downturn.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

I've executed the roll-in from my old 401k to my new 401k, and the in-kind transfer of my TIRA from eTrade to a TIRA at Fidelity is in progress. Once that's done I'll roll the TIRA into my new 401k. Next steps are to shift cash into NY muni and natl limited term, buy $10k ibonds, and execute the backdoor Roth.

I have about $140k cash to invest in bond fund shares in my taxable account. A couple questions about this:

- Should I be investing 50% in NY long term and 50% in natl limited term, for diversification? Or is the ratio dependent on my total bond holdings in my portolio? Sorry if this was discussed earlier in the thread, lots for me to absorb.

- I understand that timing the bond market is stupid. So do I just accept that interest rates may go higher and the fund NAV may continue to dive for the time being? The NY muni fund is at -10.12% YTD. Holding cash YTD has hurt less, considering the current inflation rate. I guess buying into NY muni now is buying low, and that's a good thing.

I'm not going to shift my brokerage to Fidelity since their transaction fees for these bond funds are high, though their $1000 offer was enticing. Considering moving my brokerage--and Roth IRA--back to Vanguard so I can buy the bond funds in admiral shares, not to mention I prefer Vanguard's service over eTrade. Before I put energy into that, are there any risks/problems associated with moving accounts back and forth like this?
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Aguilar wrote: Wed Aug 24, 2022 6:20 pm - Should I be investing 50% in NY long term and 50% in natl limited term, for diversification? Or is the ratio dependent on my total bond holdings in my portolio? Sorry if this was discussed earlier in the thread, lots for me to absorb.
Personally, I consider muni bonds to be distinct from other bonds (like a total bond fund), given their specific exposure to state and local governments. So I'm not sure your other funds matter (in relation to how much state vs. multi-state - aka national - funds.

As to the ratio - personally I keep pretty close to 50/50 split.

But I've seen others, especially from "large" states like NY and CA make the case for tilting in favor of the state, or even exclusively using a state fund. That argument usually points out that the "state economy" is larger than many countries, thus by shear size of the state (number of counties, cities, etc.), it's already more diversified than many individual states. On many levels, I find that argument to be compelling. But then I think about "statewide" impacts, such as the different handling of the COVID lock downs and impacts to the local economy that differed between states...

One potential side note, it may be useful to think in terms of how much of your portfolio your muni funds will be. For example, it's generally considered that funds which are < 5% of your portfolio aren't going to make much difference in the grand scheme of things. So if your total muni funds are < 5% of your portfolio, "simplification" (and some extra tax savings) might move me towards a single state fund approach. But if they'll be over 10%, then I think splitting them makes sense... (And in between is a judgement call.)
Aguilar wrote: Wed Aug 24, 2022 6:20 pm - Considering moving my brokerage--and Roth IRA--back to Vanguard so I can buy the bond funds in admiral shares, not to mention I prefer Vanguard's service over eTrade. Before I put energy into that, are there any risks/problems associated with moving accounts back and forth like this?
Minimal risk. The main caution would be to ensure you have records of your cost basis before transfer. That's the most likely thing to have an issue... Although I've never had a problem.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

SnowBog wrote: Wed Aug 24, 2022 7:55 pm
One potential side note, it may be useful to think in terms of how much of your portfolio your muni funds will be. For example, it's generally considered that funds which are < 5% of your portfolio aren't going to make much difference in the grand scheme of things. So if your total muni funds are < 5% of your portfolio, "simplification" (and some extra tax savings) might move me towards a single state fund approach. But if they'll be over 10%, then I think splitting them makes sense... (And in between is a judgement call.)
Ok, I'll go for 60/40 NY to natl. My muni funds will make up about 8% of my portfolio once I move all my cash over.

Regarding the move of my brokerage and Roth to Vanguard, I'll call Vanguard to find out if my cost basis for covered shares would transfer. I think it will. But there's one thing that puzzles me which is that I checked the oldest transactions in my brokerage on eTrade and the # shares purchased doesn't match exactly the # shares that was listed on Vanguard.com before I moved my portfolio to eTrade. I have all the Vanguard historic data in a spreadsheet. The numbers on eTrade are very close but not exactly the same as the Vanguard-provided data. The price paid on eTrade doesn't match Share Price on Vanguard. When I look at total gain on eTrade against Value and compare the difference with the Amount on Vanguard, it doesn't add up exactly either. I'm not sure who to contact about this or how to go about reconciling it, and I'm guessing I need to sort that out before moving back to Vanguard. Side note, Vanguard told me last week that they don't have any of my historic data anymore so all I have is my spreadsheet.

I have another piece of homework. Correct me if this isn't the right advice, but someone told me that for non-covered shares, I should input the cost basis into eTrade's platform. I have a spreadsheet with the shares transacted, share price, and $ amount per transaction since my first investment with Vanguard in 2008. I don't know how to input the cost basis (I assume I'm supposed to simply input the $ amount per transaction?) into eTrade yet but I plan to call them for help. Should I do this before moving back to Vanguard? Or will I lose the data and have to reenter it in Vanguard's platform? Maybe this is a question for eTrade and Vanguard though something makes me lack trust in them on this subject.

Alas, I thought I changed my cost basis method in my brokerage to Specific ID a while ago but it seems eTrade has two fields you need to change for cost basis, and I hadn't adjusted both, so my brokerage was still set for FIFO. Poor user interface. I just changed the lot selection to Specific ID. Should I do the same for my Roth or does that not matter since it grows tax free?
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Roth doesn't matter much, unless you plan to withdraw before 59 1/2...

If you can, you should try to reconcile the differences between Vanguard and eTrade before moving funds, as it is likely too late by then... But if the differences are small, and you didn't have Specific ID enabled, it might just be what it is...

But as a "best practice", it's good to have a record of # of shares and cost basis before a transfer. And then you use that to ensure the transfer was completed correctly, including the cost basis. While in theory, brokerages would do this correctly for you - again best practice is to use your own records to validate.

Regarding non-covered shares, there I'm less sure... The few I've dealt with, I just reported the proper cost basis on my tax forms. TurboTax marked the particular transactions that didn't have the cost basis, I found the correct basis, and TurboTax updated accordingly. In theory, reporting those to the broker might save you that step. But I'm not sure if that info is even "transferred" to a new brokerage... Part of me thinks it isn't... It's a "user supplied" value, so I'd think the broker would want you to provide that directly to them (or just provide on your taxes). But again, not sure here...
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

Thanks, I’ll see about calling E*trade and Vanguard to reconcile the differences. Last time I called Vanguard the rep said since I closed my account they have no records of my transaction history.

Makes sense regarding manually entering data for non covered shares. Probably not worth doing it in E*trade if I move back to Vanguard since it wouldn’t likely transfer.

Since I didn’t elect Specific ID till recently how does that impact my tax consequences if and when I sell a lot of shares? Would I need to pay taxes based on average cost (that was my election before) for any shares I acquired before I changed to specific ID? Does the brokerage handle telling me what my tax liability is come tax time?

I’ve never sold stocks in my brokerage so I’m new to this.

Side note, I’ve moved my old 401k to my new 401k at Fidelity, moved my E*trade TIRA to a Fidelity TIRA in kind, and today executed a TIRA roll in to my 401k, so I’ll figure out if I’ll move my E*trade brokerage and Roth to Vanguard next, and from there I’ll invest in munis 60/40 and do the backdoor Roth.

Something tells me reconciling the transaction data between eTrade and Vanguard will be the trickiest part of this process.
User avatar
retiredjg
Posts: 49201
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by retiredjg »

This is a long thread....remind us why you would move from eTrade to Vanguard? I thought you were happy with eTrade.
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Aguilar wrote: Wed Aug 31, 2022 8:18 am Since I didn’t elect Specific ID till recently how does that impact my tax consequences if and when I sell a lot of shares? Would I need to pay taxes based on average cost (that was my election before) for any shares I acquired before I changed to specific ID? Does the brokerage handle telling me what my tax liability is come tax time?

I’ve never sold stocks in my brokerage so I’m new to this.
Unfortunately, I'm not sure... It really depends on what records the brokerage has kept. And they may work differently in that case...

IIRC when I first switched to specific ID at Fidelity, I already had shares that had previously been purchased. Again IIRC Fidelity switched things seamlessly, such that when I looked at the account later, I was able to see all the "lots" with their individual cost basis for each. Maybe that memory is false or misleading, as maybe I only had a single "lot" in there at the time...

But again, it really depends on what data the brokerage and/or you kept. If you can identify the lots, and you can select those specific share, then you should be set.

Think about this from the "sell" side. Let's say you've bought 100 shares in total for an average price of $100/share. If that's all the info you have, and you have no way to identify which share was bought when at what price, then yes - all you can do is use the "average cost basis" for that entire set of shares, regardless of you sell 1-100.

But if the brokerage, or you yourself, kept records to know that 25 shares were bought at $50, 50 shares were bought at $100, and 25 shares were bought at $150. And when you go to sell, you can "pick" (or use default rules to pick for you such as sell highest cost basis first) which shares to sell, then you'll be able to use the "specific cost basis" for the shares you sell (e.g. sell the 25 @ $150 first for a combined $3,750 basis on those shares).

Hopefully when you switch to specific ID, eTrade will update the data behind the scenes. But I'm not familiar with them to know for sure...
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

retiredjg wrote: Wed Aug 31, 2022 9:03 am This is a long thread....remind us why you would move from eTrade to Vanguard? I thought you were happy with eTrade.
Would be good for OP to validate...

But as I recall, they are actually consolidating primarily into Fidelity, as they have other accounts there like 401k, etc.

The eTrade to Vanguard was specifically for their muni funds, which are already in Vanguard funds, and would incur fees to buy/sell if they moved those to Fidelity.

I vaguely recall a mention of maybe being able to switch to the admiral shares at Vanguard... Otherwise, it's not clear to me what they gain from moving from eTrade to Vanguard. Sounds like both have the Vanguard mutual funds they want to use without transaction fees.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

retiredjg wrote: Wed Aug 31, 2022 9:03 am This is a long thread....remind us why you would move from eTrade to Vanguard? I thought you were happy with eTrade.
The main driver would be to get Admiral shares of the munis instead of Investor shares.

Fidelity offered me $1k to move my brokerage there and having all my portfolio there would be a plus, but there's a $75 transfer fee for the Vanguard munis. I haven't found a comparable NY and natl muni there, and they talked to me about setting up a bond ladder but I don't think that makes sense, given my long time horizon and thirst for something simple.
User avatar
retiredjg
Posts: 49201
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by retiredjg »

Aguilar wrote: Wed Aug 31, 2022 10:47 am
retiredjg wrote: Wed Aug 31, 2022 9:03 am This is a long thread....remind us why you would move from eTrade to Vanguard? I thought you were happy with eTrade.
The main driver would be to get Admiral shares of the munis instead of Investor shares.

Fidelity offered me $1k to move my brokerage there and having all my portfolio there would be a plus, but there's a $75 transfer fee for the Vanguard munis. I haven't found a comparable NY and natl muni there, and they talked to me about setting up a bond ladder but I don't think that makes sense, given my long time horizon and thirst for something simple.
Ok. I thought there were muni ETFs that were usable. But if you prefer to be at Vanguard, that's fine too....assuming you understand that Vanguard's customer service is not getting a lot of praise these days.

Hate to say it, but it's true.
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

retiredjg wrote: Wed Aug 31, 2022 11:03 am Ok. I thought there were muni ETFs that were usable.
I think the heart of it was they already own the mutual funds. So the tax implications of switching to an ETF didn't make sense...

Now, if they have "losses" they could harvest and thus switch to an ETF at no cost... That opens new doors...

Likewise, if Vanguard ever creates an ETF of their existing muni funds (particularly the state one), and lets them switch without tax impact... Again, that opens new doors...
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

SnowBog wrote: Wed Aug 31, 2022 12:46 pm
retiredjg wrote: Wed Aug 31, 2022 11:03 am Ok. I thought there were muni ETFs that were usable.
I think the heart of it was they already own the mutual funds. So the tax implications of switching to an ETF didn't make sense...

Now, if they have "losses" they could harvest and thus switch to an ETF at no cost... That opens new doors...

Likewise, if Vanguard ever creates an ETF of their existing muni funds (particularly the state one), and lets them switch without tax impact... Again, that opens new doors...
I don't own the muni funds yet. So I could opt for muni ETFs. But I don't know of any at Fidelity that are comparable to the Vanguard NY long term muni and natl limited term exempt. Do you?
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

SnowBog wrote: Wed Aug 31, 2022 10:09 am
Aguilar wrote: Wed Aug 31, 2022 8:18 am Since I didn’t elect Specific ID till recently how does that impact my tax consequences if and when I sell a lot of shares? Would I need to pay taxes based on average cost (that was my election before) for any shares I acquired before I changed to specific ID? Does the brokerage handle telling me what my tax liability is come tax time?

I’ve never sold stocks in my brokerage so I’m new to this.
Unfortunately, I'm not sure... It really depends on what records the brokerage has kept. And they may work differently in that case...

IIRC when I first switched to specific ID at Fidelity, I already had shares that had previously been purchased. Again IIRC Fidelity switched things seamlessly, such that when I looked at the account later, I was able to see all the "lots" with their individual cost basis for each. Maybe that memory is false or misleading, as maybe I only had a single "lot" in there at the time...

But again, it really depends on what data the brokerage and/or you kept. If you can identify the lots, and you can select those specific share, then you should be set.

Think about this from the "sell" side. Let's say you've bought 100 shares in total for an average price of $100/share. If that's all the info you have, and you have no way to identify which share was bought when at what price, then yes - all you can do is use the "average cost basis" for that entire set of shares, regardless of you sell 1-100.

But if the brokerage, or you yourself, kept records to know that 25 shares were bought at $50, 50 shares were bought at $100, and 25 shares were bought at $150. And when you go to sell, you can "pick" (or use default rules to pick for you such as sell highest cost basis first) which shares to sell, then you'll be able to use the "specific cost basis" for the shares you sell (e.g. sell the 25 @ $150 first for a combined $3,750 basis on those shares).

Hopefully when you switch to specific ID, eTrade will update the data behind the scenes. But I'm not familiar with them to know for sure...
I have a spreadsheet with all my transaction details from my years at Vanguard. Now that I've switched my eTrade brokerage to specific ID, does this give me the ability to sell specific lots from my entire brokerage history, considering I have the data from Vanguard? Just want to make sure I have this right. For some reason, I thought that since I just selected specific ID, that any sales of shares that I already purchased prior to changing my cost basis method would HAVE to be sold using average cost. But you mentioned eTrade might update the data behind the scenes, so it sounds like when you switch cost basis methods, it applies retroactively?

I called eTrade yesterday to speak to someone about the cost basis data not matching up with my Vanguard transaction history, but they couldn't get me answers and passed me to another dept which passed me to another, and then my cell phone battery died. I'll try again soon. I'd really like to do a three way call with them and Vanguard. Interesting to learn Vanguard customer service issues are common these days, they were always helpful for me but then again, my inquiries were always very simple back then.

My eTrade Rollover IRA is now in my Fidelity 401k. Next steps: sort out this cost basis issue, buy iBonds (Treasury Direct locked me out of my online account and it's been a nightmare trying to reach an agent there), do backdoor Roth, and then decide where brokerage will be held and buy munis.
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Unfortunately, I don't know... I don't have any accounts with eTrade...

Again, really depends on how they have things setup. If they have the data on file, hopefully the switch is seamless to you, and when done you can see your "lots" with their specific cost basis.

If after you switch, all they have/show is one big aggregate lot with the "average" cost basis - then that's what you have to work from. Maybe someone else on here has dealt with this, or maybe worth a discussion with a tax professional... But I'd think you could adjust your basis when you file taxes, provided you have the records to support those changes. (Personally, I'm not sure if I'd be comfortable with a personally created Excel file if I was audited... I'd want a record of the original transactions I could produce... But that's me...)

If it were me, I'd just switch the cost basis to specific ID and see what happens... Best case, the data needed is there and you don't have to speculate... Worst case, you have what you already have for your existing shares, but at least ensure any new shares get setup properly.
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Aguilar wrote: Fri Sep 02, 2022 10:59 am
SnowBog wrote: Wed Aug 31, 2022 12:46 pm
retiredjg wrote: Wed Aug 31, 2022 11:03 am Ok. I thought there were muni ETFs that were usable.
I think the heart of it was they already own the mutual funds. So the tax implications of switching to an ETF didn't make sense...

Now, if they have "losses" they could harvest and thus switch to an ETF at no cost... That opens new doors...

Likewise, if Vanguard ever creates an ETF of their existing muni funds (particularly the state one), and lets them switch without tax impact... Again, that opens new doors...
I don't own the muni funds yet. So I could opt for muni ETFs. But I don't know of any at Fidelity that are comparable to the Vanguard NY long term muni and natl limited term exempt. Do you?
I'm not aware of any (good) state muni ETFs - but I've not looked specifically at NY...

There is at least one Fidelity NY mutual fund which I posted about earlier.

On the national side, lots more options. Fidelity has several funds (IIRC they include FMBIX and FTABX), and many good national ETFs exist including VTEB (the ETF version of VTEAX), MUB, SUB, and others depending on the duration you want...

Personally, as I've shared before, while my preference for taxable is ETFs, I have decided to keep mutual funds for munis. There are some additional complications with Tax Loss Harvesting muni ETFs that aren't present in several mutual funds, so it's an area where that simplicity outweighs my other preferences. Plus the reality is with the majority of my accounts already at Fidelity (including employer accounts I have no say in where they are), I expect to have a long term relationship with Fidelity, so I'm less likely to need/want the portability of ETFs. This is especially true for munis, as after I retire and my tax bracket drops, I'll probably spend down my munis first (balanced with using Roth conversions, using up my 0% LTCG bracket, and managing the ACA is we go there...).
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

SnowBog wrote: Fri Sep 02, 2022 3:55 pm Unfortunately, I don't know... I don't have any accounts with eTrade...

Again, really depends on how they have things setup. If they have the data on file, hopefully the switch is seamless to you, and when done you can see your "lots" with their specific cost basis.

If after you switch, all they have/show is one big aggregate lot with the "average" cost basis - then that's what you have to work from. Maybe someone else on here has dealt with this, or maybe worth a discussion with a tax professional... But I'd think you could adjust your basis when you file taxes, provided you have the records to support those changes. (Personally, I'm not sure if I'd be comfortable with a personally created Excel file if I was audited... I'd want a record of the original transactions I could produce... But that's me...)

If it were me, I'd just switch the cost basis to specific ID and see what happens... Best case, the data needed is there and you don't have to speculate... Worst case, you have what you already have for your existing shares, but at least ensure any new shares get setup properly.

I changed my eTrade brokerage to Specific Lot, Actual Cost, and spoke w/ them. They said the cost basis method change will only apply moving forward so my history of transactions is set up with Average Cost. What I don't understand is, if I go into my brokerage, my VTSAX transaction records show tons of transactions with the same price paid. In some cases there are 10+ transactions all with the same share price, and the share price listed isn't the actual share price in my Vanguard spreadsheet. When a brokerage applies avg cost, is it common for many of the transactions to have the same price paid? I don't see this issue with my other two funds in my brokerage.

Seems I'm stuck with average cost for my covered shares up until now. I'd like to be able to report cost basis for specific lot, actual cost in my uncovered shares (pre-2012). I have the data to do it but my spreadsheet isn't official from Vanguard, and Vanguard won't help me with historic transaction data. I wonder what happens in the case of an audit if you don't have official records? Forced to pay based on avg cost plus a tax penalty? Worse?

This is probably impossible to answer but is having chosen average cost likely to cost me a lot extra in taxes vs specific lot in the grand scheme of things, or is it just that I don't have as much control over when I incur a higher tax bill vs a lower one?
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

In the "grand scheme of things" - it makes little difference...

Example, assume you had a series of purchases using "actual cost" (aka specific ID):
  • 5 shares @ $3.00
  • 10 shares @ $2.00
  • 400 shares @ $1.50
  • 35 shares @ $14.00
That's $1,125 in cost basis from 450 shares, making the "average" cost as $2.50/share.

So, using "average cost", you'd have:
[*] 5 shares @ $2.50
[*] 10 shares @ $2.50
[*] 400 shares @ $2.50
[*] 35 shares @ $2.50
[/list]

Again, total basis is still $1,125 for all 450 shares...

But what you "lose" is the opportunity to select "low" or "high" cost shares for specific transactions. For example, let's assume that the current value is $5/share, making your "average gain" $2.50 per share. If you sold any 10 shares, you'd get $500 back against a cost basis of $250, for $250 in gains. By contrast, if you could "pick" the shares (with the original basis), you could choose to sell 10 of the $14 shares, realizing a "loss" of $9/share ($90 loss in total against your taxes), or alternatively sell a set with gains such as the $1.50 basis (recognizing $350 in gains) if you needed to "generate" more taxable income for some reason (such as minimal income for ACA).

However, in the "grand scheme" of things - no difference... Regardless of "when" or "how" you sold them, the total basis of all 450 shares is still $1,125.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

SnowBog wrote: Tue Sep 13, 2022 8:40 pm In the "grand scheme of things" - it makes little difference...

Example, assume you had a series of purchases using "actual cost" (aka specific ID):
  • 5 shares @ $3.00
  • 10 shares @ $2.00
  • 400 shares @ $1.50
  • 35 shares @ $14.00
That's $1,125 in cost basis from 450 shares, making the "average" cost as $2.50/share.

So, using "average cost", you'd have:
[*] 5 shares @ $2.50
[*] 10 shares @ $2.50
[*] 400 shares @ $2.50
[*] 35 shares @ $2.50
[/list]

Again, total basis is still $1,125 for all 450 shares...

But what you "lose" is the opportunity to select "low" or "high" cost shares for specific transactions. For example, let's assume that the current value is $5/share, making your "average gain" $2.50 per share. If you sold any 10 shares, you'd get $500 back against a cost basis of $250, for $250 in gains. By contrast, if you could "pick" the shares (with the original basis), you could choose to sell 10 of the $14 shares, realizing a "loss" of $9/share ($90 loss in total against your taxes), or alternatively sell a set with gains such as the $1.50 basis (recognizing $350 in gains) if you needed to "generate" more taxable income for some reason (such as minimal income for ACA).

However, in the "grand scheme" of things - no difference... Regardless of "when" or "how" you sold them, the total basis of all 450 shares is still $1,125.

Thanks for the explanation.

Correct me if I'm wrong, but in some cases wouldn't avg cost method result in greater losses or lesser gains, in cases when the avg cost is greater than the actual cost?

I dug deeper into my brokerage and my VFWAX and VTIAX covered shares from Vanguard are using Actual Cost and Specific ID, but not VTSAX, which accounts for about $1M currently. I must've failed to adjust my cost basis method for VTSAX before my brokerage was moved from Vanguard to eTrade. I spoke with Vanguard and they said they can't provide the actual cost data to eTrade now since the transfer already happened, due to SEC rules. I asked Vanguard if they'd be able to apply actual cost if I moved my brokerage back to Vanguard and they said they have to use the data provided by eTrade. Pretty frustrating. On an aside, SEC regulations (and IRS?) here seem far too rigid.
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Aguilar wrote: Wed Sep 14, 2022 9:16 am Correct me if I'm wrong, but in some cases wouldn't avg cost method result in greater losses or lesser gains, in cases when the avg cost is greater than the actual cost?
Per my example above, if you think of all 450 shares, the answer is no. It will ultimately be the same gains or losses once all the shares are sold.

OK, there can be obvious differences based on timing... But the above assumes that you would sell shares "when needed" regardless of cost basis tracking method. So selling all 450 shares, in any order, at any dollar amount, in the same transaction(s), would have the same net results. $x total value when sold - $1125 in cost basis.

The only difference is "timing". Per my example above, you might recognize more (or less) gains earlier by using specific lots with their cost basis. But doing so means you'll do the opposite later. Again, in the end, after disposing of all 450 shares, it's likely a wash (at least in the "grand scheme" of things).
Aguilar wrote: Wed Sep 14, 2022 9:16 am On an aside, SEC regulations (and IRS?) here seem far too rigid.
My working assumption is it's a record keeping/compliance issue.

I believe brokerages have to report cost basis on tax forms when you sell. I'm assuming there are fines/penalties if they don't do that correctly. One way to ensure they do so correctly is to use the data available to them, either directly for shares you purchased from them directly, or use whatever was reported by your prior brokerage when the transfer occurs. So I can understand why they don't let random changes to that info happen - as it puts them at risk...

Beyond that, it might be worth talking to a tax person (or maybe someone more knowledgeable can come in), but it might be possible for you to adjust your cost basis when you file taxes. Tax forms have a specific place for you to do so. And I have to do so annually with my ESPP shares (which aren't reported correctly), some people have to do so with RSU shares as well. So I know there's a way to do it...

I just don't know if you can elect to switch from "average cost" to specific ID on your own, and/or what limitations and/or requirements would be on you to do so... Conceptually, if you've never sold any of the shares, and you have the original purchase price data (in a format that would satisfy an audit), then it seems like there's an argument to be made to report the adjustments. But if you did so, you'd have to do 100% of those shares in the same format - you definitely can't pick/choose some to treat with average and others specific. Which I think would rule out making adjustments for any funds that have had any shares sold and reported under "average" cost basis. Since the "average" was based on the total shares, once you sell some off, the "average" can no longer be mapped accurately back to the original.

And even if you could, I'm not sure if you should... I'd assume that adjusting your cost basis would be something that could be easily abused, and thus might be something that is more likely to raise an audit flag. Unless you feel 100% confident that you have all the data required for an audit, I wouldn't expose yourself in that way... But then again, that's how I think about everything on my taxes, if I lack the required documentation to pass an audit, it doesn't belong on my taxes...
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

SnowBog wrote: Wed Sep 14, 2022 1:30 pm
Beyond that, it might be worth talking to a tax person (or maybe someone more knowledgeable can come in), but it might be possible for you to adjust your cost basis when you file taxes. Tax forms have a specific place for you to do so. And I have to do so annually with my ESPP shares (which aren't reported correctly), some people have to do so with RSU shares as well. So I know there's a way to do it...

I just don't know if you can elect to switch from "average cost" to specific ID on your own, and/or what limitations and/or requirements would be on you to do so... Conceptually, if you've never sold any of the shares, and you have the original purchase price data (in a format that would satisfy an audit), then it seems like there's an argument to be made to report the adjustments. But if you did so, you'd have to do 100% of those shares in the same format - you definitely can't pick/choose some to treat with average and others specific. Which I think would rule out making adjustments for any funds that have had any shares sold and reported under "average" cost basis. Since the "average" was based on the total shares, once you sell some off, the "average" can no longer be mapped accurately back to the original.

And even if you could, I'm not sure if you should... I'd assume that adjusting your cost basis would be something that could be easily abused, and thus might be something that is more likely to raise an audit flag. Unless you feel 100% confident that you have all the data required for an audit, I wouldn't expose yourself in that way... But then again, that's how I think about everything on my taxes, if I lack the required documentation to pass an audit, it doesn't belong on my taxes...
I'll try to find a CPA to discuss this with. If I could use my actual cost data across the board for all of the VTSAX lots, I would. I'm just not sure if this is a big audit risk, since eTrade would report a different cost basis and my data is a spreadsheet. My actual cost data could be added up to calculate the average cost, to show that it comes to the same average cost used by eTrade. I can also show that, in the spreadsheet, the cost basis for the other two funds in my brokerage, matches what's in eTrade's records. Vanguard did say on the phone that they have my historic data, but I don't think they'll give it to me.
User avatar
retiredjg
Posts: 49201
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by retiredjg »

I think once you sell some shares using average cost basis, that changes the basis for all the other shares you owned (of that stock or fund) when that sale occurred. If that is right, you cannot use the actual cost basis of those shares (from your records) anymore because it has now changed.

But maybe shares bought later are not affected. I've heard that, but have not seen it myself.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

I never sold any of the shares but I had the account transferred to another brokerage. It turns out that locks in average cost if Vanguard applied that method as your default. I didn’t know, and thought my fund was set to actual cost since I saw actual costs in my transaction history.

I spoke to two CPAs. One said I could file a corrected cost basis. The other said it would be unwise to file a basis other than what the brokerage files. I will abide by the second CPA.

I can’t forecast how being stuck with average cost will impact my tax burden but part of me wondered if I should consider selling all the shares, taking the tax hit, and then buying another index that tracks the market, set to Specific ID. Problem is, the tax liability on the gains would be over $70k, which makes this an insensible move.

The fund stuck in average cost is VTSAX and it’s unlikely most of the shares will ever be in the red even if the fund drops 40% so there wouldn’t probably be many TLH opportunities if I had actual cost. That’s a silver lining.

I re-read the above post from snowbog about how the end result with either basis is the same. Trying to reassure myself this will work out alright, and that any missed tax break opportunities wouldn’t have been life changing.
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Aguilar wrote: Fri Sep 16, 2022 8:02 pm I re-read the above post from snowbog about how the end result with either basis is the same. Trying to reassure myself this will work out alright, and that any missed tax break opportunities wouldn’t have been life changing.
It's definitely in the "nice to have" category. It would have given you a bit more flexibility...

But "in the grand scheme of things", will make very little difference. Your savings rate, ability to live below your means (which helps savings rate as well), and ability to stay the course will matter far more in the end.
User avatar
retiredjg
Posts: 49201
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by retiredjg »

Aguilar wrote: Fri Sep 16, 2022 8:02 pm I re-read the above post from snowbog about how the end result with either basis is the same. Trying to reassure myself this will work out alright, and that any missed tax break opportunities wouldn’t have been life changing.
Not only will this not be life-changing, it won't even be a blip.

Your basis is the same (overall) no matter which system is used. You have lost nothing of importance. In fact, now that some shares are assigned a higher basis than they really cost might make them "reachable" to TLH at some point.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

retiredjg wrote: Sat Sep 17, 2022 8:18 am
Aguilar wrote: Fri Sep 16, 2022 8:02 pm I re-read the above post from snowbog about how the end result with either basis is the same. Trying to reassure myself this will work out alright, and that any missed tax break opportunities wouldn’t have been life changing.
Not only will this not be life-changing, it won't even be a blip.

Your basis is the same (overall) no matter which system is used. You have lost nothing of importance. In fact, now that some shares are assigned a higher basis than they really cost might make them "reachable" to TLH at some point.
I hadn’t thought of that. There’s a decent chunk that have a higher basis now. And the rest have a lower basis, obviously. I suppose this all depends on how low the share price ever goes but yeah, it’s some sort of silver lining.

Is it the case that in these two scenarios id pay the same cumulative cap gains tax?

- if I sell all the shares using average cost over time (not at once)
- if I sell all the shares using actual cost over time on the same days as example 1 (so same share prices)

Still wrapping my head around this.
User avatar
retiredjg
Posts: 49201
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by retiredjg »

Aguilar wrote: Sat Sep 17, 2022 10:16 am Is it the case that in these two scenarios id pay the same cumulative cap gains tax?

- if I sell all the shares using average cost over time (not at once)
- if I sell all the shares using actual cost over time on the same days as example 1 (so same share prices)

Still wrapping my head around this.
It is not possible to answer this exactly because one year, you might sell enough/have enough income to end up in the NIIT zone (which would add 3.8% to your capital gains tax rate). Or an IRMAA zone. Or something along that line.

But in general, your basis is your basis. And the gains will be whatever they are on the day you sell.

If you were to sell the entire taxable account at one time, the tax will be based on the total gains minus the total basis. It does not matter if the basis is held in 10 shares or 100 shares. It does not matter if one share has a basis of $1 and other share has a basis of $10.

The tax is based only on the gains minus the basis. The total basis does not change no matter what system you are using.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

retiredjg wrote: Sat Sep 17, 2022 10:46 am
Aguilar wrote: Sat Sep 17, 2022 10:16 am Is it the case that in these two scenarios id pay the same cumulative cap gains tax?

- if I sell all the shares using average cost over time (not at once)
- if I sell all the shares using actual cost over time on the same days as example 1 (so same share prices)

Still wrapping my head around this.
It is not possible to answer this exactly because one year, you might sell enough/have enough income to end up in the NIIT zone (which would add 3.8% to your capital gains tax rate). Or an IRMAA zone. Or something along that line.

But in general, your basis is your basis. And the gains will be whatever they are on the day you sell.

If you were to sell the entire taxable account at one time, the tax will be based on the total gains minus the total basis. It does not matter if the basis is held in 10 shares or 100 shares. It does not matter if one share has a basis of $1 and other share has a basis of $10.

The tax is based only on the gains minus the basis. The total basis does not change no matter what system you are using.

I see. I’ve been in the NIIT zone for a few years now and if all goes well career-wise I foresee being in it for years to come based on wages and dividends alone. That said, it’s impossible to predict my cap gains per sale under these two scenarios so that would, I suppose, make it impossible to answer my question? I was hoping to learn that cap gains would even out in the end regardless of cost basis method, not just if I sold all shares at once, which I don’t foresee ever doing (unless, for some reason, I found myself in the 0% cap gains rate due to prolonged unemployment, which no one wants).
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Aguilar wrote: Sat Sep 17, 2022 11:24 am
retiredjg wrote: Sat Sep 17, 2022 10:46 am
Aguilar wrote: Sat Sep 17, 2022 10:16 am Is it the case that in these two scenarios id pay the same cumulative cap gains tax?

- if I sell all the shares using average cost over time (not at once)
- if I sell all the shares using actual cost over time on the same days as example 1 (so same share prices)

Still wrapping my head around this.
It is not possible to answer this exactly because one year, you might sell enough/have enough income to end up in the NIIT zone (which would add 3.8% to your capital gains tax rate). Or an IRMAA zone. Or something along that line.

But in general, your basis is your basis. And the gains will be whatever they are on the day you sell.

If you were to sell the entire taxable account at one time, the tax will be based on the total gains minus the total basis. It does not matter if the basis is held in 10 shares or 100 shares. It does not matter if one share has a basis of $1 and other share has a basis of $10.

The tax is based only on the gains minus the basis. The total basis does not change no matter what system you are using.

I see. I’ve been in the NIIT zone for a few years now and if all goes well career-wise I foresee being in it for years to come based on wages and dividends alone. That said, it’s impossible to predict my cap gains per sale under these two scenarios so that would, I suppose, make it impossible to answer my question? I was hoping to learn that cap gains would even out in the end regardless of cost basis method, not just if I sold all shares at once, which I don’t foresee ever doing (unless, for some reason, I found myself in the 0% cap gains rate due to prolonged unemployment, which no one wants).
Correct - impossible to answer as there are too many moving parts, tax rates, things like NIIT, your other annual income (aka how much is left in each bracket after ordinary income), differences in annual deductions, the amount of "gains" or "losses" in any given year, etc.

If you keep all of the above the same, which means selling all shares the same year, you will have exactly the same gains and same taxes for both average cost and specific ID.

But if the sale is spread out over several years, where a nearly infinite number of variations on the inputs can occur, it's impossible to know exactly how they'll turn out. Average could actually turn out better... You just don't know...

Just to give two examples, let's say you had a wide range of purchase prices - which are all now "averaged". That means more shares might have a "loss" if the price goes down below the acreage in a crash, which could give you a larger TLH opportunity than you might have had. Conversely, let's say the market never crashes bad enough to get below your "average" price, but it gets close - that likely means you missed out an a potential TLH (as your "above average" shares would have otherwise been a TLH opportunity). Again, impossible to know what the future does...

But, think about it this way... Let's say you maybe have or miss a $10k TLH because of this change. Let's say your tax rate is 24% — that's a potential $2.4k difference... But the TLH will result in a lower cost basis going forward, at some point you'll still pay gains on that extra basis. Let's assume LTCG is still 15% in the future, you'll owe $1.5k in taxes on the original TLH. Which means your "net" impact is LIKE ± $900 (on a $10k TLH). Not sure about you, but that won't let me retire a year earlier, or save less money...

So "in the grand scheme of things" it's nothing to worry about... You just accept what is, keep focusing on the important things (savings rate, etc.) and move on.
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

SnowBog wrote: Sat Sep 17, 2022 2:28 pm
But, think about it this way... Let's say you maybe have or miss a $10k TLH because of this change. Let's say your tax rate is 24% — that's a potential $2.4k difference... But the TLH will result in a lower cost basis going forward, at some point you'll still pay gains on that extra basis. Let's assume LTCG is still 15% in the future, you'll owe $1.5k in taxes on the original TLH. Which means your "net" impact is LIKE ± $900 (on a $10k TLH). Not sure about you, but that won't let me retire a year earlier, or save less money...

Thanks for the additional info about selling all shares in one year vs multi year. That makes sense.

Just want to ensure I follow you correctly about the above example. So you sell shares for a $10k loss and apply the loss to offset ordinary income because you don't have any capital gains to offset. Assuming 24% tax bracket for the next handful of years, that amounts to $2.4k in tax savings. When you sell the shares for a loss, you wait 31 days and buy the fund back, or buy a similar fund and then sell those shares to move back to the original fund. Assume here you have a lower basis now—would that always be the case? Later on you sell those shares and have to pay cap gains on the extra basis. I'm guessing the extra basis is worth $10k (the amount you took in losses), no matter how much the shares gain by the time you sell? So .15x10k=$1.5k in taxes, bringing your net tax savings down to $900.

That said, am I correct that, based on this projection, a $400k loss would result in $36k in ultimate tax savings?

Some thoughts that would affect the outcome:
- Tracking error - if you buy a similar fund and end up sticking with it long term, it could perform better or worse than the original
- Short term cap gains - if you buy a similar fund but exchange to the original fund in 31 days, after the similar fund has gained, if the gains are significant that would eat at your total tax savings when you sell the original fund down the road
- Using the losses to offset LTCG vs income - if offsetting LTCG, the tax savings would be less since LTCG currently are a lower rate than my tax bracket
- State/city taxes - in my case, living in NYC increases ultimate tax savings a bit, assuming i sell the shares down the road while living in a state without state/city taxes
- Whether you sell the shares you purchased after realizing the loss. Ie. if you never sell and donate the shares or pass them to heirs, the step-up wipes away the LTCG.
- Timing of the purchase of the similar fund (or the identical fund if wait 30 days) since this will impact whether the first dividend is qualified.

One of the articles I came across cites a 0.28% benefit in tax savings from TLH and upwards to 1% in tax savings but only in decades where there have been major market crashes. That's far smaller than some of the claims I've come across on Bogleheads. Article: https://alphaarchitect.com/2019/04/buye ... -benefits/
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

Again, it's impossible to be precise, as we don't know what the future brings...

But all else being equal, is your tax rate when you recognize the loss is 24% on your tax rate (likely LTCG) is 15%, that's a delta of 9% saved on taxes.

In the real world, it might be more or less depending on lots of variables. Not the least of which is future changes to future tax rates. Or to use a more actionable example, let's say you move from a no income tax (or one that has a lower LTCG rate) to a high income tax state (with no LTCG). Any "savings" you might have had years earlier could be offset by the now higher state taxes.

But the largest TLH benefits will come if you can harvest (and use) losses in high taxed years, and then recognize the extra gains (which were previously a loss) in lower taxed years. That's all really TLH is...
Topic Author
Aguilar
Posts: 245
Joined: Fri Jan 24, 2020 11:01 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by Aguilar »

SnowBog wrote: Mon Sep 19, 2022 2:32 pm Again, it's impossible to be precise, as we don't know what the future brings...

But all else being equal, is your tax rate when you recognize the loss is 24% on your tax rate (likely LTCG) is 15%, that's a delta of 9% saved on taxes.

In the real world, it might be more or less depending on lots of variables. Not the least of which is future changes to future tax rates. Or to use a more actionable example, let's say you move from a no income tax (or one that has a lower LTCG rate) to a high income tax state (with no LTCG). Any "savings" you might have had years earlier could be offset by the now higher state taxes.

But the largest TLH benefits will come if you can harvest (and use) losses in high taxed years, and then recognize the extra gains (which were previously a loss) in lower taxed years. That's all really TLH is...
You mentioned you track your portfolio in a spreadsheet so you can see your AA in real time. Do you have any tips on how to go about this? I'd like to build a spreadsheet as well but don't know how to pull in real-time market data.
SnowBog
Posts: 3478
Joined: Fri Dec 21, 2018 11:21 pm

Re: Portfolio check and 3 questions - tax efficiency when rebalancing, iBonds, Roth conversion

Post by SnowBog »

I use the paid version of Excel, which includes access to various data types. https://support.microsoft.com/en-us/off ... a89e210877

I just enter in a ticker, like VTI in A2. Select the financial data type. Then I use that in formulas like =A2.Price to get the current price of VTI (in cell A2).

There's ways to do similar things in Google sheets.
Post Reply